The next tech correction might already be loading

The Bank of England has warned that big technology stocks could face a sharp drop in value, as concerns grow about a possible AI bubble in global markets.

In its latest Financial Stability Report, the Bank said UK share prices are close to their most stretched levels since the 2008 financial crisis.

It also said US stock market valuations now look similar to those seen before the dotcom crash in the early 2000s.

Companies focused on AI were named as being particularly stretched.

The Bank also announced plans to reduce how much capital High Street banks must hold.

This is aimed at boosting lending and supporting economic growth.

It would be the first cut to these buffers since 2008.

Recent stress tests showed banks could cope with a severe downturn, including rising unemployment, falling house prices and a 5% drop in the economy.

On AI, the Bank said the sector’s growth over the next five years is expected to be driven by trillions of dollars in investment, much of it funded through borrowing.

Forecasts suggest global spending on AI infrastructure could pass $5 trillion (£3.8 trillion).

While some firms will fund this themselves, about half is expected to come from outside funding, mainly debt.

The Bank warned that closer links between AI firms and credit markets could increase risks if share prices fall.

Losses on loans could rise quickly during any market downturn.

Other major institutions have raised similar concerns. The head of JP Morgan has said he is more worried than most about the risk of a serious market correction.

The International Monetary Fund and the OECD have also warned about possible price falls in AI-related stocks.

The Bank noted that today’s AI boom differs from the dotcom era because many leading firms are profitable and generating cash.

However, it said this does not mean all companies will benefit equally, even if AI helps lift productivity across the economy.

Beyond AI, the Bank said risks to global financial stability increased in 2025 due to geopolitical tensions, trade disputes and higher government borrowing.

It also warned that growing tensions between countries have raised the risk of cyber-attacks and other disruptions.

The proposed change to capital rules would lower the Tier 1 buffer requirement from 14% to 13% from 2027.

Even after the change, banks would still hold a £60bn safety buffer above minimum levels.

The Bank said this should make it easier for lenders to support households and businesses.

The report also warned that many homeowners still face higher costs.

Those coming off fixed-rate mortgages in the next two years are expected to see an average £64 rise in monthly repayments, an increase of around 8%.

By 2028, 3.9 million mortgage holders are expected to refinance at higher rates, although a third may see repayments fall as interest rates ease.

The base rate has already fallen from 5.25% in 2024 to 4%.

UK economy doing UK economy things. - MV